Economy in Brief

Manufacturing output in the U.K. came to a standstill in February, the same as in January, but upward momentum more broadly continues in place.

Manufacturing output is falling by 2.3% over 12 months, rising by 1.4% at an annual rate over 6 months and then slowing to a gain of 0.4% over 3 months – but it is still rising. This sequence falls short of being an ongoing sequential acceleration; however, the results for output are clearly on the upswing and better than what they've been over the past year by a long shot.

In February, consumer durables output rose by 4.3%, consumer nondurables output fell by 1.1%, intermediate goods output was flat while the output of capital goods moved up to 1% after falling 0.7% in January.

Sequential growth characteristics by sector The sequential growth rates for output shows consumer durables output continues to fluctuate. Output is flat over 12 months, declines by 5.3% at an annual rate over 6 months, then expands at a 2.7% annual rate over 3 months. Consumer nondurable goods likewise have a trendless profile with output lower by 0.3% over 12 months, rising at a strong 4.7% annual rate over 6 months, then falling at a 3.9% annual rate over 3 months. Intermediate goods show acceleration, rising from a 5.4% decline over 12 months to register a 4.7% annual rate drop over 6 months, then climbing to a 1.2% annual rate gain over 3 months. The highlight of industrial production is capital goods which falls short of having a clear sequential acceleration; nonetheless it's quite clear that output is progressing toward that goal. Capital goods output is lower by only 0.1% over 12 months, up at a 5.5% annual rate over 6 months, then, the 3-month annual rate slips slightly to 4.8%. The 3-month and 6-month growth rates are both still quite strong and impressive.

In the quarter-to-date, U.K. output is still struggling. Manufacturing output 2 months into the first quarter is falling at a 0.6% annual rate, durable consumer goods output is falling at a 2.5% annual rate, nondurable consumer goods output is falling at a 7.2% annual rate, but the output of intermediate goods is rising at a 0.9% annual rate and the output of capital goods is rising at a 3.4% annual rate. For the time being, consumer goods industries are having the most difficult time finding the road to recovery.

Since COVID struck, U.S. industrial production has been struggling and of course Brexit also overlaps with this adjustment. The U.K. is still undergoing its adjustment to its Brexit exit. But compared to January 2020, overall manufacturing output three years later is only higher by 0.7%. Consumer durable goods output is higher by 1.5%, nondurable consumer goods output fares much better, rising by 8.1% from its level of January 2020. But on this timeline, the output of intermediate goods is lower by 1.6% and the output of capital goods is also lower by 2.8%. All in all, COVID and post-COVID has been a difficult time for industrial production in the U.K.

The table also shows performance of a few industries in the U.K. Food, beverages & tobacco show declines in February along with textiles & leather industries, electricity, gas & water (utilities) where output fell by 2.2%. However, motor vehicle & trailer output rose by 2.6% and output in mining & quarrying rose by 3%.

Sequential growth rates for these industries show negative growth rates on all horizons for food, beverages & tobacco. There is sequential contraction underway for textiles & leather where there's an increase of 3.2% over 12 months, but then a decline at a 3% annual rate over 6 months, then a decline at a 7.8% annualized rate over three months and a clear sequential deterioration and contraction for textiles & leather. Motor vehicle & trailer output, on the other hand, are volatile and largely growing; sector output is down by 0.8% over 12 months but growing at a 24.5% annual rate over 6 months and at a 3.3% annual rate over three months. Mining & quarrying shows an 8.9% decline over 12 months, a 4% annual decline over 6 months, and a drop at a 19.6% annual rate over 3 months. Output in this sector is clearly declining on all the horizons but without a clear trend. Utilities output in the U.K. just declines in all three horizons although once again without any clear trend; the decline over 12 months is 5.4% while the annualized decline over 3 months is only at a 1.9% pace.

Industries QTD On a quarter-to-date basis, only one of these industries shows an increase of any significance; that's motor vehicles & trailers where output is up at a 1.4% annual rate; food, beverages & tobacco has a minor 0.1% uptick in the QTD. Utilities output is falling at a 2.8% annual rate, textiles & leather output is falling at a 4.1% annual rate, and mining & quarrying output is falling at an 18.7% annual rate.

The COVID period These industries have also been challenged in the COVID period. Among them, only food, beverages & tobacco shows an increase from January 2020; that industry shows an increase of 8.7%. On the other hand, textiles & leather is lower by 9%, motor vehicle & trailer output is down by 29.8%, mining & quarrying is off by 15.8%, and even utilities output – which is unstockable and usually experiences trend growth- is down by 0.7% over this three-year period.

Japan's PPI has ticked lower in March falling by 0.1% after falling by 0.3% in February and after coming up flat in January. The sequential percentage changes for the PPI show that deceleration has been well underway. The PPI is up by 7.2% over 12 months; that falls to a 4.5% annual rate over 6 months and becomes a decline of at a 1.3% annual rate over 3 months. Do I hear in the background the sound of a BOJ victory dance?

For manufactured goods, Japan's PPI rose by 0.2% in March after rising 0.3% in February and falling by 0.3% in January. Despite the higher gains, this index also shows clear deceleration in progress. Over 12 months, the all manufacturing goods PPI has risen at a 5.6% annual rate, compared to a 3.3% annual rate over 6 months and an annual rate increase of just 0.7% - under 1% - over the last three months.

Global trends This trend fits in with global trends where data are not quite as up-to-date as the data released for Japan. Nonetheless in European the European Monetary Union (EMU), there are progressive declines in the PPI for manufacturing; the same is true in the United States. Japan's own CPI also shows progressive declines underway and Japan’s CPI core deviates slightly as it shows a 2.1% gain over 12 months, a deceleration to a 1.6% annual rate over 6 months and then moves back up to a 2% pace over 3 months.

The bottom two entries in the table allow a comparison the Japanese PPI data directly with these other data series that are one-month older. On that basis, we see Japan’s PPI decelerations remain fully in place although the declines that are experienced with a one-month lag are not quite as robust which is not surprising because of the decline in place in the month of March which gets omitted when we calculate the data in this fashion as if updates ended in February.

In the quarter-to-date (QTD) on completed data for Q1 2023 for Japan, we see Japan's PPI is rising at a 2.6% annual rate; manufacturing PPI is rising at a 2% annual rate. The QTD annual rates for inflation in the EMU and the U.S., data that are one month older, show QTD increases of about 1% at an annual rate or less. Japan's own CPI in the QTD on data through February is rising in a 3.3% annual rate with its core at a 1.2% annual rate. And finally, reworking the statistics for Japanese PPI and for manufacturing to exclude the March data and put it on the same footing as the global data, we find a much higher 6.6% annual rate rise in the QTD through February for the total PPI and an increase at a 3.7% annual rate for manufacturing.

Impact of oil prices These data suggest strongly that the inflation progress that is underway is relatively recent. Sequential data on oil prices show that oil prices are lower by 26.2% over 12 months, falling at a 20.7% annual rate over 6 months and falling at a 16.4% annual rate over 3 months. While different countries will experience oil prices in different ways (because of exchange rates), the percentage changes we enter on the table are for Brent, expressed in euros. Setting aside exchange rate issues, we can see that oil prices have been generating negative inflation forces that are quite significant in each of these periods of 12 months, 6 months, and 3 months. And while the decline in oil prices have let up considerably (from falling at a 26% annual rate to a 16% annual rate), they are still substantial and we know that the impact of oil prices on domestic price levels is not instantaneous but occurs over some period of time so there's probably still some more inflation progress in the pipeline from past oil price declines.

The last column reminds us that oil prices tend to have a significant impact on PPIs, and we see correlations there that range from roughly 0.4 to nearly 0.7 but the largest being for finished goods PPI in the United States. However, notice that for Japan Brent oil prices have a negative correlation to the CPI essentially a negligible correlation for the headline and a correlation of -0.35 for the core.

Retail sales volumes in February in the euro area fell by 0.8% after rising 0.8% in January in the wake of a 1.5% drop in December. Food and beverage purchases fell after following the same pattern as overall sales in the previous two months.

However, sequential sales patterns show total retail sales volumes falling 3.1% over 12 months, improving to a 2.8% decline over six months and then falling sharply by 5.9% over three months.

Spending on food and beverages has been improving; sales fall at a 4.8% pace over 12 months but cut that pace of decline to a -3.9% pace over six months and then fall by just 2.7% at an annual rate over three months.

Motor vehicle sales in the EU rose by 0.8% in February after falling in each of the previous two months. Registrations of motor vehicles are slowing sequentially. They rise by 11.5% over 12 months; that slows to a 5.2% annual rate gain over six months, then motor vehicle registrations fall at a 16% annual rate over three months. Registrations of motor vehicles are clearly on a weakening trend.

Quarter-to-date sales With two months of data in hand, total retail volume is falling at a 1.9% annual rate in the first quarter. Sales of food and beverages are rising at a 0.3% pace and motor vehicle registrations are falling at a 10.8% annual rate.

Country level performance Erratic monthly results- Looking at sales by country, there are ten European countries that are early reporting countries in the table; of these, 7 show sales declines in February. However, this follows January when eight of them posted increases; January, in turn, follows December in which eight of them posted declines. Retail sales patterns have been choppy over the last few months. No country on the table has three straight months of month-to-month sales increases or three straight months of month-to-month declines.

Accelerators vs. decelerators- Growth rates show there are three countries Germany, Portugal, and Belgium where the 12-month to 6-month to 3-month sales trends are getting progressively weaker. There are also three countries Italy, Denmark, and the United Kingdom, where the progressive sales from 12-month to 6-month to 3-month are getting progressively stronger (FYI: I do not consider Italy’s ‘technical’ slowing to a 6.3% annualized rate over three months to be a real slowing; it is the same as the six month pace of 6.5%). The remaining trends are mixed.

Growth vs. shrinkage- Acceleration and deceleration aside only Italy and Spain have positive growth rates over all three periods. However, Germany, Belgium, Sweden, and Norway all display declines in retail sales over all three horizons. Clearly, declines are dominating the data for European retail sales.

QTD by Country- Although total retail sales volumes decline on a quarter-to-date basis fall, there are quarter-to-date declines in only four countries in the table Germany, Belgium, Sweden, and Norway. Of course, the table includes several countries that are not members of the European Monetary Union. However, among EMU members, only Belgium and Germany show QTD declines in retail sales.

Sales compared to Pre-COVID levels- This has not been a period of strength for retail sales in Europe. Among the 10 countries in the table, looking back over a three-year period, results are uneven. Compared to January 2020 before COVID struck, six countries as of February have sales lower than they were then. Countries with sales higher than they were in 2020 include Italy, where sales are up by 9.2%, Portugal where sales are up by 3%, the Netherlands where sales are up by 3%, and Norway where sales are up by 1.6%. Total retail sales volumes in the euro area are higher by 1.7% and motor vehicle registrations are lower by 18.5%.